4 ms·

Its not that trivial. ISO's have a $100k limit.

by hatred 9y ago

sulam 9y ago
Yeah, there's a couple reasons for RSUs to exist and the cap is a big one (the other is shareholder limits). However, the issue is vesting, not the RSU itself. You can delay RSU vesting to happen at a liquidity event and the problems go away. That leads to a bad situation where employees are stuck holding their "earned but not vested" RSUs and can't quit (similar to what already happens to people who can't afford to exercise their ISOs, or even if they can, they get bombed by AMT and don't have a liquid stock to pay taxes with). This seems like a solvable problem. If all it did was cause companies to figure out how to make their shares liquid in some fashion (IPO, secondary market, private exchange -- something) that would be net-positive for employees.
- CapnCrunchie 9y ago
  I worked for a company where RSUs did not vest until liquidity event. There were a lot of earned options that people still haven't been able to exercise. People that have been there for over 8 years. I just forfeited mine and moved on to a different company.
- closeparen 9y ago
  This has been the strategy, but the bill is invalidating it: >“Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date.“ From Fenwick’s analysis.
djrogers 9y ago
Yes, but that’s $100k worth of vesting per year based on the value at grant date. Very few situations exceed that in illiquid companies. [1] http://www.naspp.com/blog/2009/08/iso-100000-limitation.html http://www.naspp.com/blog/2009/08/iso-100000-limitation.html
- chimeracoder 9y ago
  > Yes, but that’s $100k worth of vesting per year based on the value at grant date. Very few situations exceed that in illiquid companies. That's... not rare at all. For a company with a $5 million valuation, you only have to be offered 2% of the company in order to hit that cap. An early employee could easily hit that. And of course, as the company grows, it becomes easier and easier to hit that cap, because it's based on an absolute dollar value (the valuation of a company will always grow faster than the percentage offered will shrink - or to look at it another way, if it doesn't, you probably don't want to exercise those options anyway, so the conversation is moot).
  - andreasklinger 9y ago
    So essentially you have a linear limit to the one part that is promised to be potentially exponential?
    - chimeracoder 9y ago
      > So essentially you have a linear limit to the one part that is promised to be potentially exponential? It's not a linear limit - it's a fixed (constant) cap, but yes. This doesn't mean you can't receive more than $100,000 in options, but it does mean you'll be taxed on those as NSOs, which is much higher. Also, note that because of the cliff, you receive your full first year on a single day, which means that your second year's worth of options are much more likely to exceed the ISO cap and auto-convert to NSOs.
    - sulam 9y ago
      Just keep in mind it’s the value when you join that matters, not how that value grows over time. If you’re not over the cap in your initial grant, you won’t be surprised later (the one exception being refresh grants — which are rare in early stage companies).
  - sulam 9y ago
    My experience has been that it’s much easier to hit it later vs earlier. It’s very rare to be offered more than 1% of a company that is already worth $5M. The people who get offers like this are, it turns out, the ones complaining about this tax law most loudly. They are not run of the mill employees. Later, when a company is close to going public, normal packages will often have less growth in valuation assumed and so it becomes easier to hit the cap as a regular employee. That is not coincidentally the same time companies switch to RSUs. (Someone made the point elsewhere in this discussion that inflation will render the cap more of an issue as time goes on. They have a real point, I think. Combined with inflated A rounds this may start to be more common than it has been in the last 20 years.)

Its not that trivial. ISO's have a $100k limit.

by hatred 9y ago

Its not that trivial. ISO's have a $100k limit.

Yeah, there's a couple reasons for RSUs to exist and the cap is a big one (the other is shareholder limits). However, the issue is vesting, not the RSU itself. You can delay RSU vesting to happen at a liquidity event and the problems go away. That leads to a bad situation where employees are stuck holding their "earned but not vested" RSUs and can't quit (similar to what already happens to people who can't afford to exercise their ISOs, or even if they can, they get bombed by AMT and don't have a liquid stock to pay taxes with). This seems like a solvable problem. If all it did was cause companies to figure out how to make their shares liquid in some fashion (IPO, secondary market, private exchange -- something) that would be net-positive for employees.

CapnCrunchie 9y ago
I worked for a company where RSUs did not vest until liquidity event. There were a lot of earned options that people still haven't been able to exercise. People that have been there for over 8 years. I just forfeited mine and moved on to a different company.
closeparen 9y ago
This has been the strategy, but the bill is invalidating it: >“Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date.“ From Fenwick’s analysis.

djrogers 9y ago

Yes, but that’s $100k worth of vesting per year based on the value at grant date. Very few situations exceed that in illiquid companies. [1] http://www.naspp.com/blog/2009/08/iso-100000-limitation.html http://www.naspp.com/blog/2009/08/iso-100000-limitation.html

chimeracoder 9y ago
> Yes, but that’s $100k worth of vesting per year based on the value at grant date. Very few situations exceed that in illiquid companies. That's... not rare at all. For a company with a $5 million valuation, you only have to be offered 2% of the company in order to hit that cap. An early employee could easily hit that. And of course, as the company grows, it becomes easier and easier to hit that cap, because it's based on an absolute dollar value (the valuation of a company will always grow faster than the percentage offered will shrink - or to look at it another way, if it doesn't, you probably don't want to exercise those options anyway, so the conversation is moot).
- andreasklinger 9y ago
  So essentially you have a linear limit to the one part that is promised to be potentially exponential?
  - chimeracoder 9y ago
    > So essentially you have a linear limit to the one part that is promised to be potentially exponential? It's not a linear limit - it's a fixed (constant) cap, but yes. This doesn't mean you can't receive more than $100,000 in options, but it does mean you'll be taxed on those as NSOs, which is much higher. Also, note that because of the cliff, you receive your full first year on a single day, which means that your second year's worth of options are much more likely to exceed the ISO cap and auto-convert to NSOs.
  - sulam 9y ago
    Just keep in mind it’s the value when you join that matters, not how that value grows over time. If you’re not over the cap in your initial grant, you won’t be surprised later (the one exception being refresh grants — which are rare in early stage companies).
- sulam 9y ago
  My experience has been that it’s much easier to hit it later vs earlier. It’s very rare to be offered more than 1% of a company that is already worth $5M. The people who get offers like this are, it turns out, the ones complaining about this tax law most loudly. They are not run of the mill employees. Later, when a company is close to going public, normal packages will often have less growth in valuation assumed and so it becomes easier to hit the cap as a regular employee. That is not coincidentally the same time companies switch to RSUs. (Someone made the point elsewhere in this discussion that inflation will render the cap more of an issue as time goes on. They have a real point, I think. Combined with inflated A rounds this may start to be more common than it has been in the last 20 years.)